Food Industry

Ukrainian food industry includes over 5000 enterprises of different ownership types producing about 3700 different brands of products. 89.8 % of the previously state owned companies were privatized by the end of 1999. Food industry is growing fast with average annual growth rate of 9 % and is on the leading position in the FDIs attraction: about 21 % of total FDIs stock in Ukraine is in this sphere.

Ukrainian food industry is processing 4 million tns of meat and poultry, 20 million tns of milk, 45 million tns of sugar-beet, and 2.5 million oil contained plants per year. Companies annually produce about 1 million tns of confectionary products, 35 thousands tns of margarines, 0.58 billion litres of spirits, 0.46 billion litres of alcoholic drinks, 1.7 billion litres of beer, 1.4 billion litres of other beverages (Atlanta Capital, 2001). Food industry consists of 20 sectors: milk, meat, oils, beverages and beer, strong drinks, confectionery, flour and bakery, canned products, fish, and others.

The number of joint ventures or foreign-owned food processing enterprises in Ukraine is currently growing. Economic instability highlighted by unfavourable press coverage is the primary reason that many foreign or multinational food processing companies have been reluctant to invest in Ukraine to the same extent they have invested in Eastern Europe and Russia. Given the nature of the food processing industry (the importance of global market share and international brand recognition), it is anticipated that once Ukraine has made more economic progress, these companies will enter the Ukrainian market and seek investment opportunities (BISNIS Report, 1999).

EU’s New Neighbours: The Case of Ukraine

Heinz (USA) is in Poltava and Odessa producing liquid and dry baby food. Commodities International Limited (C.I.L.), a USA -Ukrainian joint venture, is working with a Khmelnitskiy-based enterprise to process and package beef and pork for sale in the Russian and Ukrainian markets. Kraft Foods has bought into a confectionery plant in Sumy. In July 1996, Midnight Sun Inc. (Sweden) established the joint venture "South Food Inc." to produce tomato sauce, ketchup, and canned vegetables under the "Chumak" brand name. In 1996, McDonald's opened its first restaurant in Ukraine (Kiev) and invested 72 million USD in Ukraine (BISNIS Report, 1999).

Confectionery

649 companies are operating in confectionery market in Ukraine. Almost 600 of them produce cookies and biscuits, 16 – chocolate and 57 – caramels. In 2002, industry produced 743.4 thousands tns of products (approximately 600 million USD), what is 3.1 % more than in 2001 (721 thousands tns). The leaders on the market are (Table 52): AVK (Donetsk), Dnepropetrovsk Confectionary Factory (Dnepropetrovsk), Kiev-Konti (Donetsk), Svitoch (Lvov) and Confectionery Corporation Roshen (Kiev). Confectionery producers consider Ukrainian market as practically saturated. Only few large foreign investors are playing in this market: Nestlé (Svitoch), Kraft Foods Ukraine (Trostyanets) and Sigma Bleyzer (Poltavakonditer). Producers state than more than 250 million USD was invested in to Ukrainian confectionery industry during the last years (Ukrainian and foreign investments).

Table 52. The shares of Ukrainian Confectionery Manufacturers, 2002, tns and %

Company Production, tns Share, %

ROSHEN Confectionery Corporation, Kiev 175 038 23.6

AVK, Donetsk (25.1 % owned by WesternNIS Fund) 72 083 9.7

Kiev-Konti, Donetsk 66 925 9.0

Svitoch, Lvov (Nestlé) 39 676 5.3

Dnepropetrovsk Confectionery Factory, Dnepropetrovsk 33 296 4.5 Svit Lasoscshiv, Cherkasy 26 665 3.6

Poltavaconditer, Poltava (Sigma Bleyzer) 23 558 3.2 Kraft Jacobs Sushard Ukraine, Trostyanets 21 634 2.9

Zhitomyrskie Lasoscshi, Zhitomyr 21 586 2.9

Odessa, Odessa 21 328 2.9

Zaporozhie Confectionery Factory, Zaporozhie 20 245 2.7 Kharkov Bisquit Factory, Kharkov 18 833 2.5

Kharkovchanka, Kharkov 18 127 2.4

The rest of 550 manufacturers 183 833 24.7

Total 742 827 100.0

Source: www.roshen.com

This market is producing more than 200 different brands of confectionery in different segments: candy (production decreased last year by 4.1 %), chocolate (output decreased by 3.4 %), cookies and biscuits (increase of 15.3 %). The prices on the confectionery products

are expected to increase by 5 – 10 % in 2004 due to higher raw materials prices. Cacao prices were doubled in 2002, and wheat prices also grew.

ROSHEN Confectionery Corporation is the largest Ukrainian confectionery manufacturer.

Its factories in Kiev, Vinnytsa, Mariupol and Kremenchug produce about 30% of all Ukrainian confectionery. Its product range comprises more than 200 kinds of sweets, chocolate, sugar candies, cookies, waffles, fruit jellies and cakes. The total production volume is up to 200 000 tns of confectionery a year. Roshen’s products are available in Russia, Kazakhstan, Moldova, Estonia, Latvia, the USA, Canada, Germany and Israel (Company’s web pages).

Nestlé (Switzerland)

Nestlé (Switzerland) is one of the leading food producing companies in the world with turnover of 60 billion USD in 2002. Company employs 224 thousands people and owns 468 factories and industrial enterprises of food industry, perfume and cosmetics production and pharmaceuticals in 84 countries.

The first half of the 1990s proved to be a favourable time for Nestlé: trade barriers crumbled and world economic markets developed into a series of more or less integrated trading areas.

The opening of Central and Eastern Europe, as well as China, and a general trend towards liberalization of FDI was good news for a company with interests as far-flung and diverse as Nestlé. While progress since then has not been as encouraging, the overall trends remain positive. Consolidation since 1996 has been demonstrated by the acquisition outright of the Italian mineral water concern San Pellegrino (1997), the acquisition of Spillers Petfoods of the UK (1998), and also with the decision to divest the Findus brand in order to concentrate on high added-value frozen food products (1999). Since then, Ralston Purina was acquired (2002) and the pet care business is now joint world leader and known as Nestlé Purina PetCare. In the same year, the former Perrier Vittel water business was re-named Nestlé Waters, recognizing the fact that the dynamic bottled water business accounts for a growing share of Group’s sales (company’s web pages).

December, 1994, Nestlé has established its representative office in Kiev, Ukraine and started active promotion of its famous brands: Nescafe (nowadays, it takes about 50 % of the Ukrainian coffee market), Nuts, Nesquik and Maggi. Today, Nestlé is one of leading companies in Ukraine in the food industry and the leader of the coffee market. Nestlé strengthens its position in Ukraine by investing in to the local production and industrial infrastructure, active brands promotion and development of the national distribution network.

EU’s New Neighbours: The Case of Ukraine

In 1998, Nestlé has bought majority of shares of confectionery factory “Svitoch” in Lvov.

Since that time Nestlé invested 40 million USD into technical and industrial re-equipment of the factory. Nestlé company planned in 1998 to invest 41 million USD to the confectionary production development on the Svitoch factory in Lvov. In the mid 2001 about 50 percent of planned investments were made.

Svitoch is one of the oldest Ukrainian factories and one of the leaders of the Ukrainian Confectionery, producing high quality chocolate under the modern technology. Svitoch was privatized in 1996. According to the official statistics, Svitoch produced 38.6 thousands tns of confectionary products in 1999 (in 1998 – 34.7 thousands tns). In 2001 production increased by 14 % to 42 thousands tns of confectionary products.

November, 7, 2003, Nestlé signed agreement on purchasing 100 % shares of Volynholding (Lutsk) – the leader of the Ukrainian ketchup and mayonnaise market (company controls about 60 % of the ketchup market and 35 % of the mayonnaise market). Volynholding, founded in 1994, produces products with the brand name “Torchin product”.

In this way, Nestlé is successfully diversifying its business in Ukraine, which initially was presented only by coffee and chocolate brands. By purchasing “Torchin product”, Nestlé got a strong local brand in Ukrainian market.

Kraft Foods (USA)

Kraft Foods is a part of the Philippe Morris Corporation possessing 121 enterprises in different parts the world. Kraft Foods Ukraine is one of the leading confectionery producers in Ukraine.

Kraft Foods bought chocolate factory “Ukraine”(Trostyanets) in 1994. The production capacity of the factory was relatively low in that time – only 15 thousands tns per year. Kraft Foods introduced first new brand “Korona” in 1995. Since that time, the company is developing all the time and produces several famous brands of chocolate. The existing production capacity of the factory is 35 – 40 thousands tns per year. Kraft Foods has about 50

% of the chocolate bars market in Ukraine. The company does not plan to buy new confectionery factories in Ukraine, but develop the existing one.

Currently, Kraft Foods is operating mainly on the three segments of the Ukrainian food market: confectionery (“Korona”, “Milka”, Siesta), coffee (“Jacobs”, “Maxwell House”) and snacks (chips “Lux”, extrusion “Cerezos”).

In 1999, the company bought a factory producing chips. Chips “Lux” takes almost 80 % of the chips market in Ukraine. In 2003, Kraft Foods has launched new product Cerezos – extruded salted snacks. The company plans to occupy about 18.5 % of this market segment by the end of 2004.

Kraft Foods has spent more than 200 million USD in Ukraine, including 75 million USD to industrial capacities, and much more into promotion, advertising, marketing.

Milk Processing Industry

Ukraine has about 400 dairies. Nearly 80% of Ukraine's dairies are members of the National Association of Dairies. The leaders of the Ukrainian diary market are Galakton (13 % market share), Laktaris Ukraine (8 %), Pavlogradsky Dairy (5 %), Wimm-Bill-Dann (5 %) and Pridneprovsky Dairy (3 %).

There are a number of the foreign companies working in the dairy sector. Parmalat (Italy) has a share of the Kiev Dairy No. 4. Estonian United Dairies has invested 2 million USD to build a "United Dairy Plant of Ukraine" in Zaporozhie. In 1999, the company launched a dairy processing facility with a projected capacity of 80 tns per day. Developed Technology Resource, Inc. (USA), through its ownership in Food Master International L.L.C. (FMI), purchased a controlling interest in a Ukrainian dairy in Uman, located 210 kilometres south of Kiev. The Uman Dairy produces a variety of dairy products for the Ukrainian market, including ice cream, yogurt, sour milk and sour cream. Developed Technology Resource, Inc.

received a 500 000 USD development grant from USAID (BISNIS Report, 1999).

41 % of the equipment used for processing milk products is imported, mainly from Germany, Switzerland, Italy, Finland, Denmark and Hungary. Ukraine has recently started producing separators, which previously had only been available from Russia and Western Europe.

Galakton (Russia)

Galakton was founded in 1995 on the base of Kiev City Dairy number 2, built in 1961. Since 2002, the majority owner of Galakton is Russian Group “Planet Management”. Company employs 1000 people. Currently, Galakton is processing about 400 tns of milk daily; annual turnover is about 45 million USD. The company has about 10 % share in the Ukrainian annual milk production volume.

EU’s New Neighbours: The Case of Ukraine

Galakton is one of the most successful companies in the Ukrainian milk processing sector.

The company’s capitalization is more than 20 million USD. Galakton invested 3 million USD into new production line in 2000.

Wimm-Bill-Dann (Russia)

Wimm-Bill-Dann Foods is the market leader in the dairy and juice products in Russia.

Wimm-Bill-Dann grew from a leased production line at the Lianozovsky Dairy Plant in 1992 to a publicly listed food conglomerate, employing more than 18,000 people. Today Wimm-Bill-Dann owns 24 manufacturing facilities in 20 locations in Russia and the Commonwealth of Independent States (CIS), as well as distribution centres in 26 cities in Russia and abroad. The company also distributes its products in Canada, Germany, Israel, the Netherlands, the UK and the United States through both its own distribution network and independent distributors. In Moscow alone, there are over 2000 shops working directly with Wimm-Bill-Dann, offering its wide range of products to consumers. The company also supplies its products to Russia’s Presidential Administration, Federation Council, embassies and banks, airlines and schools, to name but a few. On February 8, 2002, Wimm-Bill-Dann became the first Russian consumer company to list Level 3 ADRs on the New York Stock Exchange (NYSE) and the third Russian company ever to be listed on the NYSE. Financial Highlights of 9 months 2003: Sales amounted 684.6 million USD; Gross profit amounted 208.4 million USD; Net income amounted 20.8 million USD (Company’s web pages).

According to the AC Nielsen study of 9 major Russian cities in 2002, Wimm-Bill-Dann Dairy was the leader in many packaged dairy products with a market share, in terms of sales volume, of 38.4 %. In the 1st half 2003, Wimm-Bill-Dann Juice’s market share in Russia was 35 % in terms of sales volume. Wimm-Bill-Dann has a strong and diversified branded portfolio. Its dairy brands include “Little House in the Village” and “Chudo”, and its best known juice brand, J7, enjoyed 99 % awareness in Moscow as of July 2001 according to a study conducted by Independent Marketing Consultants Association, a Russian market research company (Company’s web pages).

In 1995, Wimm-Bill-Dann acquired a majority share of the Lianozovo Dairy Plant.

In 1996 and 1997, company acquired majority stakes in the Moscow Baby Food Plant, the Tsaritsino Dairy Plant and the Ramenski Dairy Plant. In 1998 and 1999, Wimm-Bill-Dann began to expand into regions outside Moscow, acquiring dairy plants in Novosibirsk, Nizhny Novgorod and Vladivostok. In 2000 and 2001, the company acquired majority stakes in dairy plants in Bashkortostan and the Krasnodar region in Russia, as well as plants in Kiev, Ukraine and Bishkek, Kyrgyzstan. In July 2001, Wimm-Bill-Dann completed the acquisition

of additional 15% interests in Lianozovo Dairy Plant and Tsaritsino Dairy Plant. In 2001, it acquired 100% interests in dairy plants in Altaisky and Voronezh regions of Russia. In May 2002, Wimm-Bill-Dann Foods acquired control of Gulkevichsky Maslozavod ZAO (Krasnodar Region), Moloko Veidelevki OOO (formerly Veidelevsky Factory of Dry Fat-free Milk, Belgorod Region), and obtained operational control of Novokuibyshevskmoloko (Novokuibyshevsk, Samara Region).

In 2000, Wimm-Bill-Dann bought 60 % shares of Kiev City Milk Plant number 3 (KGMZ). In November, 2002, Wimm-Bill-Dann paid approximately 1.7 million USD for 76 % shares of Burynsky Dried Milk Plant (Sumy region, Ukraine). This transaction has supplied the company with own dried milk facilities on the strategically important Ukrainian market.

Burynsky Dried Milk Plant was built in 1974 and renovated in 1985. The plant employs 150 people and is able to process 300 tns of milk daily and produce 18 tns of butter.

In July, 2002, Wimm-Bill-Dann has paid about 4.5 million USD for a 75 % share of Kharkov Dairy – one of the leading in Ukraine milk processing plants. The plant was built in 1973 with capacity of 500 tns daily milk processing. Currently, 200 tns of milk is processed daily.

Wimm-Bill-Dann considers Kharkov Dairy as a strong player on the Ukrainian milk market with experienced employees, good raw-materials supplies, significant market share (8.7 %) and famous brands. Nowadays, Kharkov Dairy produces more than 60 milk product brands.

Starting from 2001, the plant produces its products under the trade mark “ROMOL”. The company produces about 2 500 tns of milk products monthly. 70 % of the company’s products are sold in Kharkov, where Kharkov Dairy has a 24 % market share (Amer Nielsen Investigation on 4 main Ukrainian cities).

In 2003, Wimm-Bill-Dann invested 8.1 million USD in the new production line of yogurts on the Kharkov Dairy. The equipment for production is supplied by Tetra Pak (Sweden) and for packaging by Hassia (Germany). The production capacity of the line is 5000 kilograms per hour.

On January 26, 2004, Wimm-Bill-Dann announced about the installation of new manufacturing lines at the Company’s two dairy plants located in Ukraine. This investment is part of a company-wide programme to install the latest high technology equipment in the dairy business to enhance productivity. Total investment in equipment was over 13.3 million USD.

Equipment made by ASMA (Italy) has been installed for the bottling of milk products in plastic bottles at Kiev Dairy Plant number 3. The total cost of the project exceeded

EU’s New Neighbours: The Case of Ukraine

6.1 million USD. At the Kharkov Dairy Plant, the Company installed and launched a filling line for pasteurized dairy products packaged in 500g and 1 000g Tetra Brik Square containers, made by Tetra Pak (Sweden), with a production capacity of six thousand containers per hour.

The total cost of the project was approximately 1.1 million USD. In addition, Wimm-Bill-Dann installed an ERCA-47001, made by ERCA-FORMSEAL (France) for the filling and packaging of cheese desserts with a production capacity of three tns of finished products per hour. The total cost of the project was approximately 6.1 million USD (Company’s web pages information).

In document EU's New Neighbours: The Case of Ukraine (sivua 103-110)